Marina Zech (pictured), financial economist at LGT Capital Partners argues that while political and cyclical headwinds in Malaysia are cause for concern, solid fundamentals allow for a positive long-term outlook.
Malaysia has lately caused negative headlines worldwide because of unprofitable and opaque investment practices of its state investment vehicle 1Malaysia Development Berhad (1MDB). Allegations range from misallocations to wastage and enrichment. While not only political, but also cyclical headwinds are cause for concern, solid fundamentals allow for a positive long-term outlook. The case of 1MDB now stretches into ever higher political circles as Prime Minister Najib itself is accused of enrichment. Although he has denied taking money for personal gain, he has so far not ruled out using these funds – almost USD 700 mn – to finance election campaigns in May 2013.
Under the guise of ensuring public safety and stability, the government has currently been taking rigorous measures against various media involved in revealing the misappropriation of funds. Furthermore, several ministers were fired at the beginning of this week. The situation of the loss-making state fund and the associated entanglement of Prime Minister Najib remain highly opaque. Political tail risks have risen accordingly. Political developments have also taken their toll on financial markets. The Kuala Lumpur Composite Index lost around 10% within one year, and the Malaysian ringgit has recently crossed the psychologically important threshold of MYR 3.80 against the US dollar. In the aftermath of the Asian crisis, the Malaysian currency was fixed at this rate during 1998 until 2005. Hence, the exchange rate has fallen to a 17-year low despite central bank interventions.
Malaysia is struggling with the commodity bear market But not only the turbulent political scenery, but also the deteriorating economic momentum of the Southeast Asian economy has caused financial markets to tumble. The resource-abundant country has been facing cyclical headwinds from low energy prices. Palm oil as well as crude oil and gas are among major export goods. In the wake of the oil price collapse, the state-owned oil giant Petronas had recently been forced to cut capital expenditures sharply. In addition, Malaysia’s important trading partner China is plagued by cyclical woes. Accordingly, the current account surplus has fallen considerably in recent years, amounting to only 3.5% of gross domestic product (GDP), compared to a record-high 17% in 2008.